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CASE NO.: Writ Petition (civil)  577 of 2000

PETITIONER: Rahuta Union Co-op. Bank Ltd. & Anr.

RESPONDENT: Union of India and others  

DATE OF JUDGMENT: 26/02/2004

BENCH: S. N. Variava & H. K. Sema.

JUDGMENT: J U D G M E N T

WITH

WP (C) No.578, 579/2000 and TC (C) No.63 of 2003

S. N. VARIAVA, J.

       These Writ Petitions have been filed challenging a scheme  framed by the Reserve Bank of India (for short RBI).   

At this stage, some relevant facts may be briefly set out: On 2nd August, 1985 Sikkim Banking Overseas Corporation Limited got  itself registered as a Company in Sikkim.  On 22nd October, 1987 its  name was changed to Sikkim Banking Limited (for short SBL).  On 11th  December, 1987 the Banking Regulation Act (for short the Act)  became applicable to Sikkim.  Section 22 of the Act reads as follows:                 "22. LICENSING OF BANKING  COMPANIES.-  (1) Save as hereinafter provided, no  company shall carry on banking business in India unless it  holds a licence issued in that behalf by the Reserve Bank  and any such licence may be issued subject to such  conditions as the Reserve Bank may think fit to impose.   (2) Every banking company in existence on the  commencement of this Act, before the expiry of six months  from such commencement, and every other company  before commencing banking business in India, shall apply  in writing to the Reserve Bank for a licence under this  section :  Provided that in the case of a banking company in  existence on the commencement of this Act, nothing in  sub-section (1) shall be deemed to prohibit the company  from carrying on banking business until it is granted a  licence in pursuance of this section or is by notice in  writing informed by the Reserve Bank that a licence cannot  be granted to it :  Provided further that the Reserve Bank shall not give  a notice as aforesaid to a banking company in existence on  the commencement of this Act before the expiry of the  three years referred to in sub-section (1) of section 11 or  of such further period as the Reserve Bank may under that  sub-section think fit to allow.  (3) Before granting any licence under this section,  the Reserve Bank may require to be satisfied by an  inspection of the books of the company or otherwise that  the following conditions are fulfilled, namely :-   (a)  that the company is or will be in a position to  pay its present or future depositors in full as  their claims accrue;

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(b)   that the affairs of the company are not being,  or are not likely to be, conducted in a manner  detrimental to the interests of its present or  future depositors;   (c)  that the general character of the proposed  management of the company will not be  prejudicial to the public interest of its  depositors;  (d)  that the company has adequate capital structure  and earning prospects;  (e)   that the public interest will be served by the  grant of a licence to the company to carry on  banking business in India;  (f)  that having regard to the banking facilities  available in the proposed principal area of  operations of the company, the potential scope  for expansion of banks already in existence in  the area and other relevant factors the grant of  the licence would not be prejudicial to the  operation and consolidation of the banking  system consistent with monetary stability and  economic growth;  (g)  any other condition, the fulfillment of which  would, in the opinion of the Reserve Bank, be  necessary to ensure that the carrying on of  banking business in India by the company will  not be prejudicial to the public interest or the  interests of the depositors.  (3A) Before granting any license under this section  to a company incorporated outside India, the Reserve  Bank may require to be satisfied by an inspection of the  books of the company or otherwise that the conditions  specified in sub-section (3) are fulfilled and that the  carrying on of banking business by such company in India  will be in the public interest and that the Government or  law of the country in which it is incorporated does not  discriminate in any way against banking companies  registered in India and that the company complies with all  the provisions of this Act applicable to banking companies  incorporated outside India.   (4) The Reserve Bank may cancel a licence granted  to a banking company under this section -  (i)    if the company ceases to carry on banking  business in India; or  (ii)    if the company at any time fails to comply with  any of the conditions imposed upon it under  sub-section (1); or  (iii)   if at any time, any of the conditions referred to  in sub-section (3) and sub-section (3A)  is not  fulfilled :  Provided that before cancelling a licence under  clause (ii) or clause (iii) of this sub-section on the ground  that the banking company has failed to comply with or had  failed to fulfill any of the conditions referred to therein, the  Reserve Bank, unless it is of opinion that the delay will be  prejudicial to the interest of the company’s depositors or  the public, shall grant to the company on such terms as it  may specify, an opportunity of taking the necessary steps  for complying with for complying with or fulfilling such  condition.  (5) Any banking company aggrieved by the decision  of the Reserve Bank cancelling a licence under this section  may, within thirty days from the date on which such  decision is communicated to it, appeal to the Central  Government.

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(6) The decision of the Central Government where an  appeal has been preferred to it under sub-section (5) or of  the Reserve Bank where no such appeal has been  preferred shall be final."

SBL applied for a license.  It appears that RBI did not issue any  notice informing SBL that the license could not be granted.  Thus SBL  continued to carry on banking business by virtue of the proviso of sub- clause (2).   In 1996 RBI pointed out certain operational deficiencies in the  working of SBL.  SBL was called upon to cure those deficiencies before  the license could be issued to it.   Thereafter RBI advised SBL to raise  additional capital to the extent of Rs. 50 crores by way of rights  preferential issue.  RBI made it clear that it would consider issue of a  license to SBL only after the capital was so raised.   SBL managed to  raise an extent of Rs. 15.18 crores, out of which approximately Rs.  5.80 crores was by means of diversion of SBL’s own funds.  In  February-March 1997 RBI conducted financial inspection of SBL and  found several shortcomings and deficiencies in its functioning.     All the Petitioners have deposited amounts in SBL.            In a special scrutiny conducted in 1998 RBI found that non- performing assets or bad debts were Rs. 58.26 crores, whereas  provision was only Rs. 1.52 crores.    This meant that SBL had  incurred a net loss of Rs. 56.22 crores.  Ultimately by a letter dated  15th December, 1998 RBI issued a show-cause-notice to the Managing  Director Shri A.M. Mustafi under Section 36 AA(2) and pending reply  prohibited him from acting as the Managing Director.  In January 1999  RBI removed Shri A. M. Mustafi and appointed three additional  Directors on SBL’s Board.   Thereafter special audit was carried out.    As a result of the audit the Government of India was informed about  the poor state of affairs in SBL.   The Government of India was  informed that the funds had been siphoned out to the tune of Rs.   57.50 crores.     On 8th March, 1999, on the advise of RBI, the Government of  India passed an Order of Moratorium under Section 45 (2) of the Act.   SBL filed a Writ Petition in the High Court of Sikkim challenging the  Order of Moratorium.  However, the Petition was dismissed on 2nd  September, 1999.   The Special Leave Petition filed against the Order  has also been recently dismissed.            On 21st December, 1999 the Government of India issued an  Order notifying a Scheme of Amalgamation under Section 45(7) of the  Act.  By this scheme SBL was amalgamated with the Union Bank of  India (for short UBI).  Under the scheme all the depositors were to be  paid on pro-rata basis.   It is an admitted position that the depositors  are only getting 9.037 % of their deposits and they are required to  surrender their fixed deposit receipts in return.            It was submitted that the scheme is contrary to the legislative  mandate of Section 45 of the Act.  It was submitted that the Scheme  was unrealistic and not capable of being implemented, as it has not  kept the interest of the depositors in mind.  It is submitted that there  has been no proper audit of SBL.  It is submitted that the values  shown in the scheme are not the correct values and the Scheme does  not reflect the real financial position.  It is submitted that the scheme  was framed behind the back of the Petitioners and no notice had been  issued to them.  It was also submitted that since no license had been  granted to SBL it could not be considered to be a Bank and therefore  RBI had no powers to frame a scheme under Section 45 of the Act.  It  was further submitted that no serious efforts had been made to  recover the debts and that therefore the interest of the depositors has  not been taken care of.    It was submitted that therefore this Court  should set aside the Scheme.           It was denied that the provisions of the Act have not been  complied with and/or that suggestions of depositors were not  considered before finalizing the Scheme.  It was denied that value  shown in the Scheme is not correct.  It was  submitted that all possible

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efforts have been made to recover amounts. In our view, no rational ground of challenge to the scheme has  been made out at all.  A full audit has been carried out. The Scheme  has taken into consideration all known assets of SBL.  Efforts to  recover debts have been made.  However, even if there were no  sufficient efforts of recovery that would not be a ground for setting  aside the Scheme.  Section 22 set out above permitted SBL to  continue to operate as a Banking Company.  Therefore, the provisions  of the Act applied to it.   It must be mentioned that an offer was made to the Petitioners  that if they felt that there was no proper recovery the debts could be  assigned to them in satisfaction of their dues and they could undertake  recoveries.  Knowing fully well that there was no feasibility of  recovery, the offer was not accepted.         We see no substance in these Writ Petitions.  The same stand  dismissed with no Order as to costs.